Suppose now the economy is described by a New Keynesian Model, where weassume rational expectations. The equilibrium is described by the following threeequations, in order the Dynamic IS, the New Keynesian PC and the MonetaryPolicy Rule:1Y₁ = E₁Y₁+1 = = rt+u!S;Yt Etyt+1(1)T4+ = BETCH+1+ky tuổi(2)rt = Y¬πt + YyYt + UMP(3)where u¹S, u and uISMP are white noise, iid disturbances identifying output, infla-tion and interest rate shocks, respectively. Then, 0, ß, к are positive model's (con-volution of) structural parameters and 4 and yy are positive policy parameters.Because of the absence of any backward-looking elements and any informationabout the future values of the disturbances, Ett+1 = Etyt+1 = 0. Find a solution for πt, уt and r₁ as function of the disturbances and the pa-rameters of the model. What are the effects of an unfavorable inflation shock(i.e. uŢ increases) on output, interest rate and inflation in this case? Interpretyour answer.

The policy undertaken by the central bank of a nation to stabilize the economy is referred to as a…

Find a solution for πt, yt and r₺ as function of the disturbances and the pa- rameters of the model. What are the effects of an unfavorable inflation shock (i.e. u increases) on output, interest rate and inflation in this case? Interpret your answer.

Find a solution for πt, yt and r₺ as function of the disturbances and the pa- rameters of the model. What are the effects of an unfavorable inflation shock (i.e. u increases) on output, interest rate and inflation in this case? Interpret your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider the classical AS-AD model with misperceptions. Assume that the economy is initially at its general equilibrium. Now, suppose the central bank considers an increase in the nominal money supply that is not anticipated by households or firms. a. How does the misperception theory work? b. Which of the three markets is first affected (labor, goods, or asset market)? Explain and show graphically how this market is affected by an unanticipated increase in the nominal money supply. c. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the short-run equilibrium. d. Use the classical version of the AS-AD model with misperceptions to explain and to show graphically how an unanticipated increase in the nominal money supply affects the long-run (general) equilibrium.
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.) Suppose people's inflation expectations are subject to ran- dom shocks: at time t-1, expected inflation in time t is Et-1t = πt-1+t-1 where n-1 is a random shock with mean zero but deviates from zero when some event beyond past inflation causes expected inflation to change. Also, Ett+1 = πt + nt.
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In which situation is a program to reduce inflation likely to have the lowest costs? if the sacrifice ratio is high and the reduction is unexpected if the sacrifice ratio is high and the reduction is expected if the sacrifice ratio is low and the reduction is unexpected if the sacrifice ratio is low and the reduction is expected
Consider the following 3-equation model: Y 108-2rCB +2(G-T) (1) rCB =4+1.5(\pi-\pi)+0.5(Y-Y) (2) \pi \pie+0.5(YY) (3) wherey isoutput, \pi isinflation, \pi e =\pi = 2, andY* = 100. Expected future inflation is \pi e, and Y-Y⚫ is the output gap. The variable rCB is the interest rate set by the central bank. We may interpret \pi as the central bank's inflation target. Government ex- penditure, G, and net taxes, T, are given and set by the government. (a) Which equation is the IS curve, and which is the New Keynesian Phillips curve? Provide a brief economic explanation for the relationship between \pi and \pi e in Equation (3). (b) Find inflation, output and interest rates when G = T = 5. (c) Now suppose G = 8.5 and T = 5. How are inflation, output and interest rates affected? Is the impact of the fiscal expansion on output magnified or reduced by monetary policy? Explain.
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
The text proposes the following model of expected inflation x = (1 - 0) x + 0,-1 What do we know about your process of the formation of expected inflation when 0 = 07 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate. OB. Last year's inflation rate will influence you to revise your estimates for this year's expected rate. OC. Regardless of what inflation was last year, you would expect it to be at the long-run average inflation rate this year. OD. Last year's inflation rate and the long-run average inflation rate have an equal impact on your view of this year's expected rate. What do we know about your process of the formation of expected inflation when 0-17 OA. Neither last year's inflation rate nor the long-run average inflation rate impact your view on this year's expected rate OB. Last year's inflation rate will be the only input for you to revise your estimates for this year's expected rate regardless of…